Model review

Bernanke forces Bank to make forecasting change

Bank of England
The Bank of England’s forecasting model has shown shortcomings (pic: Terry Murden)

The Bank of England’s forecasting of the UK economy has come in for criticism in a review by Ben Bernanke, the former US Federal Reserve chairman.

Projections fo inflation and economic growth suffer from “significant shortcomings” and the process needs serious reform, according to the review.

Mr Bernanke says these “deficiencies” contributed to the Bank’s failure to capture the scale of price pressures around the 2008 crisis.

Criticism has been levelled at members of the Bank of England’s rate-setting monetary policy committee who have been accused of failing to spot the severity of inflation over the past two years.

The latest doubts around its economic modelling have called into question how the MPC is able to set monetary policy effectively without full grasp of inflationary pressures in the economy.

It was these concerns that prompted the Bank to commission the review by Mr Bernanke who said central banks around the world had been “dealt a very bad hand” in the form of the Covid-19 crisis, supply chain disruption and Russia’s invasion of Ukraine all taking place in the space of two years.

Mr Bernanke compared the Bank of England’s forecasting performance to that of six other major central banks, including the Federal Reserve and European Central Bank, and found that it had been relatively less accurate than most. He added that other central banks’ projections had also worsened amid a series of global economic shocks.

Andrew Bailey, governor of the Bank said all forecasters were “in the same boat” but admitted that it needed to adapt and improve its response to future economic shocks.

The Bank said that it welcomes and is committed to action on all 12 of the review’s recommendations, adding that it will launch a “substantial upgrade programme”. It said it will provide an update on its changes by the end of the year, adding that integrating the recommendations will be a gradual process.

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